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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: OCTOBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-4423
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HEWLETT-PACKARD COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 94-1081436
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3000 HANOVER STREET, PALO ALTO, CALIFORNIA 94304
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (650) 857-1501
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange, Inc.
par value $0.01 per share The Pacific Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the registrant's common stock held by
nonaffiliates as of December 29, 2000 was $60,769,052,268.
Indicate the number of shares outstanding of the issuer's common stock as of
December 29, 2000: 1,932,545,791 shares.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT DESCRIPTION 10-K PART
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Pages 9-11 and 18-39 of the registrant's Notice of Annual III
Meeting of Shareowners and Proxy Statement dated January 25,
2001
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including "Factors That Could Affect Future
Results" set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 below, contains forward-looking
statements that involve risks and uncertainties, as well as assumptions that, if
they never materialize or prove incorrect, could cause the results of
Hewlett-Packard Company and its consolidated subsidiaries ("HP") to differ
materially from those expressed or implied by such forward-looking statements.
All statements other than statements of historical fact are statements that
could be deemed forward-looking statements, including any projections of
earnings, revenues, or other financial items; any statements of the plans,
strategies, and objectives of management for future operations; any statements
concerning proposed new products, services, or developments; any statements
regarding future economic conditions or performance; statements of belief and
any statement of assumptions underlying any of the foregoing. The risks,
uncertainties and assumptions referred to above include the ability of HP to
retain and motivate key employees; the timely development, production and
acceptance of products and services and their feature sets; the challenge of
managing asset levels, including inventory; the flow of products into
third-party distribution channels; the difficulty of keeping expense growth at
modest levels while increasing revenues; and other risks that are described from
time to time in HP's Securities and Exchange Commission reports, including but
not limited to the items discussed in "Factors That Could Affect Future Results"
set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 below in this report, items described in the
Annual Report on Form 10-K for the year ended October 31, 1999, and subsequently
filed reports. HP assumes no obligation to update these forward-looking
statements.
PART I
ITEM 1. BUSINESS.
PRODUCTS AND SERVICES
HP was incorporated in 1947 under the laws of the State of California as the
successor to a partnership founded in 1939 by William R. Hewlett and David
Packard. Effective in May 1998, we changed our state of incorporation from
California to Delaware.
HP is a leading global provider of computing and imaging solutions and
services for business and home, and is focused on capitalizing on the
opportunities of the Internet and the emergence of next-generation appliances,
e-services and infrastructure.
As of October 31, 2000, HP's major business segments included Imaging and
Printing Systems, Computing Systems and Information Technology Services ("IT
Services").
- IMAGING AND PRINTING SYSTEMS ("IPS") provides laser and inkjet printers
(both monochrome and color), mopiers, scanners, all-in-one devices,
personal color copiers and faxes, digital senders, wide- and large-format
printers, print servers, network-management software, networking
solutions, digital photography products, imaging and printing supplies,
imaging and software solutions, and related professional and consulting
services.
- COMPUTING SYSTEMS ("CS") provides a broad range of computing systems for
the enterprise, commercial and consumer markets. The products and
solutions range from mission-critical systems and software to personal
computers for business and home. Major product lines include
UNIX-Registered Trademark-(1) and PC servers, desktop and mobile personal
computers, workstations, software solutions and storage solutions.
- IT SERVICES ("ITS") provides consulting, education, design and
installation services, ongoing support and maintenance, proactive services
like mission-critical support, outsourcing and utility-computing
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(1) UNIX-Registered Trademark- is a registered trademark of The Open Group.
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capabilities. Financing capabilities include leasing, automatic
technology-refreshment services, solution financing and venture financing.
A summary of HP's net revenue, earnings from operations and total assets as
contributed by our principal business segments is found in Note 16 to the
Consolidated Financial Statements in Item 8 below, which is incorporated herein
by reference. A discussion of factors potentially affecting our operations is
set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Factors That Could Affect Future Results," in Item 7
below, which is incorporated herein by reference.
BUSINESS STRATEGY
HP's overall business strategy is two-fold. First, we seek to compete
against more narrowly focused competitors in the following product and services
categories: servers, software, storage, services and support, PCs and
workstations, personal information appliances and printers and supplies.
Second, we seek to leverage the depth and breadth of our product and
services portfolio across three business segments (IPS, CS, ITS) through the
development of new solutions, markets and ecosystems at the intersection of
e-services, information appliances and an always-on Internet infrastructure.
Following are more detailed descriptions of HP's principal business segments
and key activities during fiscal 2000:
IMAGING AND PRINTING SYSTEMS
HP's portfolio of printing and imaging offerings includes Internet-related
printing services, wireless printing technology, professional and consumer
imaging services, imaging supplies, the HP LaserJet and DeskJet printer
families, scanners, copiers, mopiers, fax machines, large-and wide-format
printers, PC and digital photography products and all-in-one products that
perform multiple functions.
Key product introductions in fiscal 2000 for business customers included the
Inkjet 2200/2250 printers, which provide high-performance and networked color
office printing for small workgroup environments; three new families of HP
DesignJet printers--the 500, 800 and 5000 series, which are large-format
printing systems designed to give customers competitive printing speeds and
excellent image quality; and the JetDirect 4000 print appliance, the first
product in a new category of network appliances designed to provide customers
with dedicated printing solutions.
New product introductions for consumers and small businesses included the
LaserJet 3200, a new printer, fax, scanner all-in-one product for small offices
and home offices; the Print to Mail Accessory designed to offer a one-stop mail
solution for the small business customer from forms, to folding, to Internet
postage; the DeskJet 990Cse/Cxi Professional printer, the HP PhotoSmart 1215
printer and the PhotoSmart 1218/xi printer, which all feature high print quality
at faster print speeds and wireless options that allow them to print directly
from compatible digital appliances using infrared technology; and a full line of
digital cameras, ranging from the HP PhotoSmart 215 for first-time digital
camera buyers to the HP PhotoSmart 618 and 912 for experienced photographers.
Our PhotoSmart digital cameras, photo quality printers and colorfast paper,
in combination, compete with traditional optical (film) and silver hallide
(print) technology by achieving digital output quality and endurance standards
that match and in some cases exceed traditional optical and silver hallide
technology. We expect these products to stimulate HP's imaging and printing
supplies business.
As a component of our overall strategy, we launched our printing e-services
initiative in April 2000 together with a set of printing e-service providers. HP
and our partners are developing strategies, printing appliances, and
technologies designed to drive printing to the center of the Internet by
transforming the role of printers into smart Internet appliances. With these
Internet-based services, printers are becoming local post offices, ticket
offices, shipping stations and print shops.
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In May 2000, we began to leverage our printing and imaging expertise into
the $500 billion commercial printing market when HP and Heidelberger
Druckmaschinen AG ("Heidelberger") entered into a cooperative agreement in
printing and publishing. Both companies announced the availability of two joint
solutions for the proofing market. HP, which has expertise in digital printing
and network printing solutions, and Heidelberger, which has expertise in
commercial printing and publishing solutions, believe that combining our
expertise will result in better solutions for mutual customers.
In October 2000, HP entered into another strategic alliance in the
commercial printing space with Indigo N.V. ("Indigo"), a leading provider of
digital color printing systems. As part of the alliance, we made a $100 million
equity investment in Indigo, and agree to co-develop high-end digital color
printing systems and serve as an OEM for Indigo's products. This alliance adds a
third printing technology, digital offset color, to HP's InkJet and LaserJet
technology. Digital offset color is a high-quality, ink-based offset print
technology with the performance advantages of electronic imaging. It offers
excellent print quality at high speeds and a lower per-page cost for the
customer.
COMPUTING SYSTEMS
Computing Systems is at the core of our always-on Internet infrastructure
offering, which includes Internet and network servers, software solutions (for
e-services, Internet infrastructure and management, network management and
operating systems), business and consumer desktop and mobile computers and
storage (network attached storage and storage area networks). Such products and
services are used in a variety of applications ranging from personal and small
business information management to large scale IT infrastructure solutions for
global service providers, telecommunications companies, Internet services
vendors and manufacturers.
HP's core computing products and technologies include our PA-RISC
architecture for systems and workstations, and our Explicitly Parallel
Instruction Computing (EPIC) technology, which provides the foundation for
Intel's next-generation, 64-bit high-end Itanium processor family.
HP's computing systems business includes scalable families of PCs, storage
solutions, servers and information technology systems for use in home offices,
as well as small, medium and large businesses. The application of our computers
range from small office to enterprise workgroup department and data center
implementations. Key product families include the HP 9000 series, which runs
HP-UX, our implementation of the UNIX-Registered Trademark- operating system,
and comprises multi-user computers for both technical and commercial
applications and workstations with powerful computational and graphics
capabilities; the HP NetServer series of PC servers; the HP Kayak, HP Vectra,
and HP Brio-series of desktop PCs for use in enterprise and small businesses in
vertical applications such as engineering, manufacturing and chemical analysis;
the HP OmniBook mobile PCs for use in business; and the HP Pavilion multimedia
consumer PCs.
Our e-services and Internet infrastructure software portfolio is based on a
multi-operating system strategy that leverages a suite of integrated
applications upon which dynamic e-services can be built. First, HP's multi-OS
strategy offers customers the choice of HP-UX, Linux, Windows NT and, for
HP 3000 customers, our proprietary operating system, MPE. This strategy offers
our customers significant flexibility. Built upon this multi-OS foundation is a
host of applications to support virtually any mission-critical implementation.
HP software properties include e-speak and HP ProcessManager (formerly
Changengine), which are built with an open standards approach, and have embedded
capabilities for addressing the emerging requirements of dynamic services-based
computing.
Other software offerings include OpenView, an Internet-based network and
systems management suite for integrated service management; WebQoS, which is
designed to deliver service quality based on customer relationships; the
Praesidium family of products, which is designed for security; Smart Internet
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Usage, which provides service tracking and billing; MC/ServiceGuard, which
provides high availability; and Open Call, which provides voice-enabled
e-services integration.
Key technology and service introductions in fiscal 2000 include:
SERVERS. The HP 9000 SUPERDOME SERVER was introduced in September.
Superdome, which HP believes is the fastest, most powerful, flexible and
available UNIX-Registered Trademark- computing platform in the market today, is
coupled with services such as up-front systems assessment, pre-installation
testing and tuning, utility-based pricing, and dedicated service and support
teams.
Both the HP NETSERVER LT 6000R AND LH 6000R are new four-way PC servers for
enterprise, service-provider and dot-com customers. They offer the scalability
and performance of a six-way server for the price of a conventional four-way
system.
SOFTWARE. The HP-UX 11I operating system was a major release of HP's
UNIX-Registered Trademark- operating system, which included extensive new
Internet-enabling technologies, security, and networking and management
features. The HP-UX11i was among the first major operating systems to feature
host-based intrusion detection software for protection from internal and
external attacks as a standard component of the operating system.
STORAGE. This year, we introduced the HP XP-512 high-capacity storage
solution with up to 512 disks and a capacity of 37 terabytes of data to handle
the increased requirements of information storage for Web and content caching.
HP also introduced a new line of HP ULTRIUM storage solutions, which
features data rate matching and streaming technology for enhanced transfer rate.
These new drives are based on the Ultrium format of LTO (Linear Tape-Open)
technology.
UTILITY COMPUTING. We introduced E-UTILICA, which offers to service
providers utility-like computing power and services--a pre-integrated solution
for technical-design customers including instant access to computing power and
capacity whenever it is needed over a secure Virtual Private Network.
DESKTOP COMPUTING. HP'S E-PC PERSONAL COMPUTER is a new 8-pound,
dictionary-sized PC with an innovative modular design for the enterprise. There
are only three components--a power supply, a hard-disk drive and the system
chassis--to simplify trouble-shooting and support.
During fiscal 2000, we undertook or entered into the following significant
initiatives, partnerships and acquisitions:
In April 2000, we collaborated with Cadence and Flextronics to create an
independent new company called SPINCIRCUIT. Designed as an HP e-service for the
high-tech manufacturing and design community, this business-to-business
e-commerce exchange portal runs on HP's own e-speak technology. This new company
created an Internet gateway that directly connects engineers' design desktops to
the electronics supply chain, significantly cutting costs in the manufacturing
and design process.
In May 2000, we announced our participation in the formation of Converge
(previously known as E-HITEX), a high-tech electronics trading exchange focused
on creating services designed to increase supply chain efficiency, including
readily-accessible spot markets for supply-chain purchases and sales of
component parts. This is an independent new company created by HP, Agilent, AMD,
Canon, Compaq, Gateway, Hitachi, NEC, Quantum, Samsung Electronics, SCI Systems,
Solectron, Synnex, Tatung and Western Digital.
In October 2000, we opened the HP-INTEL SOLUTIONS CENTER in Cupertino,
California, where customers can test the integration and optimization of their
e-business solutions on Intel-based HP NetServer
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systems. This testing enables enterprise and service-provider customers (ISPs,
ASPs, WSPs) to deploy their solutions more quickly and less expensively.
Also in October 2000, we agreed to acquire Bluestone Software, Inc., a
leading provider of Internet software platforms, tools and technologies,
including J2EE and XML application servers and tools. Bluestone's software is
intended to become an integrating platform for HP's e-speak and HP Process
manager, in addition to other HP services-based software offerings. The
acquisition closed on January 18, 2001.
Throughout fiscal 2000, HP unveiled several MOBILE E-SERVICES BAZAARS around
the world as vehicles for local and international partners to sign-up and
participate in the development of mobile e-services. The bazaars serve as
regional hubs for mobile e-service activities and mobile application
development, providing incubation facilities for companies developing mobile
e-services and applications based on standards such as Wireless Application
Protocol and e-speak. These forums are driving invention at the intersection of
e-services, information appliances and always-on Internet infrastructure.
IT SERVICES
HP's IT Services strategy reflects the fact that today business
transformation and IT implementation are inextricably linked. We offer a
complete life cycle of services--planning, implementation, support and ongoing
operations--that customers can choose from to take advantage of emerging
technologies and business models. HP's IT Services offers a wide variety of
services aimed at providing customers with an always-on IT infrastructure,
including consulting and implementation services for traditional and Internet-
based IT infrastructures, storage and storage-area networks, and IT management;
next-generation networks and mobile communications; proactive, mission-critical
support services; business-continuity and recovery services; and infrastructure
outsourcing and Web-hosting services. Services aimed at helping customers
rapidly implement key business solutions are also provided, including
supply-chain management, e-procurement, business intelligence,
customer-relationship management, enterprise application integration,
e-commerce, e-banking, trading communities, portals, and virtual business
networks.
At the beginning of the life cycle, IT Services offers up-front business and
technology strategy consulting, planning, education and integration services, as
well as financial services and support. HP's IT Services consultants offer
design and rapid integration services into a variety of IT business customer
solutions. HP's financing services allow customers to plan and manage the cost
of these solutions. In addition, HP's global on-site engineering force offers
support for the physical implementation of these solutions.
For customers requiring ongoing support, IT Services offers both proactive
and reactive services. HP's support services begin with basic hardware and
software warranty and support and expand up to proactive mission-critical
service that addresses the causes of downtime covering not only the computer
system but also such key elements such as storage devices, databases, networks,
and key software/middleware applications. HP's global response center manages
customer environments and provides technical assistance 24 hours a day, seven
days a week. Other ongoing services include financing, which covers product
leasing, complementary products, automatic technology-refreshment services and
solution financing.
Key introductions in fiscal 2000 included new mission-critical support
capabilities for the SAP/R3 application; insurance against loss-of-service
revenue loss; new capacity planning and performance management services for HP
storage systems; new Microsoft 2000 data-center services; expanded services for
the Linux environment; new, proactive Web-based support services that require no
end-user intervention; new Web-hosting capabilities; expanded communications
consulting for Unified
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Communications (with Cisco Systems) supporting next-generation networks and
wireless technologies; and rapid-implementation services for applications from
SAP, Ariba, BroadVision and i2 Technologies.
MARKETING
CUSTOMERS AND SALES ORGANIZATION
HP has approximately 540 sales and support offices and distributorships in
more than 120 countries. Sales are made to business and consumer customers
worldwide.
We continue to manage our business and report our financial results based on
our three business segments (CS, IPS, ITS). In addition, during fiscal 2000 HP
began to supplement this product generation structure with a customer-facing
view. The marketing and selling of our products and services have been
reorganized into two main customer-facing organizations: a Consumer Business
Organization ("CBO") and a Business Customer Organization ("BCO").
CBO comprises all of HP's consumer-related marketing and selling activities
consolidated into a single functional unit, and BCO represents the consolidation
of all of HP's business and enterprise-related marketing and selling activities
into a single functional unit.
These two customer-facing organizations are charged with building an
intimate and comprehensive understanding of their respective customers' needs.
This feedback and knowledge is then incorporated into planning decisions
supported by our product-generation organizations, such as Computing Systems and
Imaging and Printing Systems. The overall purpose of this new marketing
structure is to enable us to better leverage our core assets to deliver
world-class technology, services and solutions, and a world-class customer
experience.
CONSUMER BUSINESS ORGANIZATION: CBO is responsible for marketing and
supplying HP's consumer products around the world. CBO is organized by product
offerings, including Home PCs (Pavilion desktop and notebook products), Printing
and Supplies (DeskJet and All-in-One inkjet printers, ink cartridges and media),
Digital Imaging (ScanJet scanners, digital cameras), Digital Convergence (CD-RW
drives, DVD+RW standards work), and Information Appliances (Jornada PDAs,
embedded software). By integrating the marketing for all consumer products into
a single organization, HP hopes to reduce redundancies and better leverage
opportunities for cross-category consumer product marketing.
We are currently the market-share leader for consumer inkjet printers and
the second-largest supplier of branded consumer desktop PCs worldwide. In the
U.S., HP is the market-share leader in scanners and CD-RW drives. We have
adopted a blended channel strategy for consumer product distribution in the U.S.
that includes sales through approximately 20,000 third-party retail locations
and direct sales through hpshopping.com, a wholly-owned subsidiary formed in
May 1999 to support online sales.
Key product development initiatives include an increased focus on
consumer-oriented industrial design, providing additional beyond-the-box
consumer e-services--either independently or in conjunction with third-party
partners, and a strong cross product category marketing focus on digital
imaging.
Revenues in CBO are derived through reseller channels, including retailers,
dealers and original equipment manufacturers as well as through direct sales and
distribution to customers over the Web.
BUSINESS CUSTOMER ORGANIZATION: BCO is responsible for marketing and
delivering products, services and solutions to all of HP's business and
enterprise customers. BCO's customers include small and medium businesses as
well as global enterprises, particularly telecommunications service providers,
Internet service providers and academic, scientific and government institutions.
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BCO is charged with developing a comprehensive understanding of HP's
business customers' needs and translating this understanding into delivering
world-class services, solutions and customer experience throughout the customer
life-cycle.
To do so, BCO markets products, services and solutions that can be either
individual products and services or unique combinations of offerings from
Imaging and Printing Systems, Computer Systems and IT Services.
Revenues in BCO result from the efforts of HP's business customer sales
force, which includes direct field sales representatives, indirect sales (i.e.,
commercial channels), HP consultants, pre-sales technical personnel and
administrative support staff. BCO's direct sales force is divided into specialty
product and service representatives (such as for servers, storage, software and
services), and teams assigned directly to corporate accounts which represent all
of HP's product and service categories.
INTERNATIONAL
A summary of HP's net revenue, and net property, plant and equipment by
geographic area is set forth in Note 16 to the Consolidated Financial Statements
in Item 8 below, which information is incorporated herein by reference. More
than half of our overall revenue comes from outside of the U.S. In the last
three fiscal years, more than three-fourths of this international revenue was
derived from Europe and the Asia Pacific region. A majority of our net revenue
originating outside the U.S. was from customers other than foreign governments.
Most of HP's sales in international markets are made by foreign sales
subsidiaries. In countries with low sales volumes, sales are made through
various representatives and distributors.
For a discussion of risks attendant to HP's foreign operations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors That Could Affect Future Results--International" and
"--Market Risk," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Adoption of the Euro" in Item 7 below and
Note 4 to the Consolidated Financial Statements in Item 8 below, which are
incorporated herein by reference.
We believe that our international diversification provides stability to our
worldwide operations and revenue streams, thereby reducing the impact of adverse
economic changes in any single country.
MATERIALS
Our manufacturing operations employ a wide variety of semiconductors,
electromechanical components and assemblies, and raw materials such as plastic
resins and sheet metal. Although we believe that the materials and supplies
necessary for our manufacturing operations are presently available in the
quantities required, we sometimes experience a short supply of certain component
parts as a result of strong demand in the industry for those parts.
We purchase materials, supplies and product subassemblies from a substantial
number of vendors. For many of our products, we have existing alternate sources
of supply, or such sources are readily available.
PATENTS
HP's general policy has been to seek patent protection for those inventions
and improvements likely to be incorporated into our products and services or to
give us a competitive advantage. While we believe that our patents and
applications have value, in general no single patent is in itself essential to
us as a whole or any of our principal business segments. In addition, any of our
proprietary rights could be challenged, invalidated or circumvented, or may not
provide significant competitive advantages.
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BACKLOG
HP believes that backlog is not a meaningful indicator of future business
prospects due to the large volume of products delivered from shelf inventories,
the shortening of product life cycles and the relative portion of net revenue
related to our service and support business. Therefore, we believe that backlog
information is not material to an understanding of our business.
COMPETITION
We encounter aggressive competition in all areas of our business activity.
Our competitors are numerous, ranging from some of the world's largest
corporations to many relatively small and highly specialized firms. HP competes
primarily on the basis of technology, performance, price, quality, reliability,
brand, distribution and customer service and support. Our reputation, the ease
of use of our products, the ready availability of multiple software
applications, our always-on Internet infrastructure offering, and our customer
training, services and support are also important competitive factors.
The markets for each of our three principal segments are characterized by
vigorous competition among major corporations with long-established positions
and a large number of new and rapidly growing firms. Product life cycles are
short, and to remain competitive we must develop new products and services,
periodically enhance our existing products and services and compete effectively
on the basis of the factors listed above. In addition, we compete with many of
our current and potential partners. The successful management of these
competitive partner relationships will be critical to our future success.
Moreover, we anticipate that we will have to continue to adjust prices on many
of our products and services to stay competitive, and thus effectively manage
financial returns with correspondingly reduced gross margins.
While the absence of reliable statistics and companies with comparable
product mixes makes it difficult to state HP's relative market position with
certainty, on an overall basis we are among the largest U.S.-based companies
offering our range of general-purpose computers and personal-information,
imaging and printing products for industrial, scientific and business
applications, and information technology services. HP is the leader or among the
leaders in each of our principal business segments.
RESEARCH AND DEVELOPMENT
The process of developing new high-technology products and solutions is
inherently complex and uncertain. It requires, among other things, innovation
and accurate anticipation of customers' changing needs and emerging
technological trends. Without the introduction of new products, services and
enhancements, HP's products and services are likely to become technologically
obsolete over time, in which case revenues would be materially and adversely
affected. New products and services, if and when introduced, may not achieve
market acceptance. After the products and services are developed, HP must
quickly manufacture and deliver such products and services in sufficient volumes
at acceptable costs to meet demand.
Hewlett-Packard Laboratories, together with the various research and
development groups within the three principal business segments, are responsible
for HP's total research and development efforts.
Expenditures for research and development in fiscal 2000, including
Hewlett-Packard Laboratories and the three principal business segments, were
$2.6 billion. These expenditures were $2.4 billion in fiscal 1999 and
$2.4 billion in fiscal 1998. In fiscal 2000, total research and development
expenditures were 5.4% of net revenue, compared to 5.8% in fiscal 1999 and 6.0%
in fiscal 1998.
We anticipate that we will continue to have significant research and
development expenditures in the future to maintain our competitive position with
a continuing flow of innovative, high-quality products and services.
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ENVIRONMENT
Certain of HP's operations involve the use of substances regulated under
various federal, state and international laws governing the environment. It is
our policy to apply strict standards for environmental protection to sites
inside and outside the U.S., even if not subject to regulations imposed by local
governments. The liability for environmental remediation and related costs is
accrued when it is considered probable and the costs can be reasonably
estimated. Environmental costs are presently not material to our operations or
financial position.
EMPLOYEES
HP had approximately 88,500 employees worldwide as of October 31, 2000.
Information regarding the executive officers of HP is set forth in Part III
below.
ITEM 2. PROPERTIES.
The principal executive offices of HP are located at 3000 Hanover Street,
Palo Alto, California 94304. As of October 31, 2000, we owned or leased a total
of approximately 43.5 million square feet of space worldwide, including
1.1 million square feet currently occupied by Agilent Technologies, Inc. We
believe that our existing properties are in good condition and suitable for the
conduct of our business.
Our plants are equipped with machinery, most of which is owned and is in
part developed by us to meet the special requirements for manufacturing
computers, peripherals and systems. At the end of fiscal 2000, we were
productively utilizing the vast majority of the space in our facilities, while
actively disposing of space determined to be excess.
We anticipate that most of the capital necessary for expansion will continue
to be obtained from internally generated funds. Investment in new property,
plant and equipment from continuing operations amounted to $1.7 billion in
fiscal 2000, $1.1 billion in fiscal 1999 and $1.6 billion in fiscal 1998.
As of October 31, 2000, our sales and support operations occupied
approximately 12.6 million square feet, of which approximately 3.4 million
square feet were located within the U.S. We own 44% of the space used for
marketing activities and lease the remaining 56%.
HP's manufacturing plants, research and development facilities and warehouse
and administrative facilities occupied approximately 30.9 million square feet,
of which approximately 21.5 million square feet were located within the U.S. We
own 61% of our manufacturing, research and development, warehouse and
administrative space and lease the remaining 39%. None of the property owned by
us is held subject to any major encumbrances.
As indicated above, HP has three principal business segments: Imaging and
Printing Systems, Computing Systems and IT Services. Because of the
interrelation of these three segments, substantially all of the properties are
used at least in part by each of these segments, and we retain the flexibility
to use each of the properties in whole or in part for each of the segments.
The locations of HP's headquarters of geographic operations are listed
below:
HEADQUARTERS OF GEOGRAPHIC OPERATIONS
LATIN AMERICA EUROPE, AFRICA, MIDDLE EAST ASIA PACIFIC
Miami, Florida Geneva, Switzerland Hong Kong
10
The locations of HP's major product development and manufacturing facilities
and Hewlett-Packard Laboratories are listed below:
PRODUCT DEVELOPMENT AND MANUFACTURING
AMERICAS Vancouver, Washington ASIA PACIFIC
Cupertino, Costa Mesa, Melbourne, Australia
Mountain View, Palo Alto, Aguadilla, Puerto Rico
Roseville, San Diego, Shanghai, China
Santa Clara, Santa Monica, Sao Paulo, Brazil
Sunnyvale and Bangalore, India
Woodland, California Guadalajara, Mexico
Komiya, Japan
Fort Collins and Greeley, EUROPE
Colorado Grenoble and Singapore
Isle D'Abeau, France
Boise, Idaho Taiwan
Boeblingen, Germany
Corvallis, Oregon HEWLETT-PACKARD LABORATORIES
Dublin, Ireland
Philadelphia, Pennsylvania Palo Alto, California
(effective January 18, 2001) Amsterdam and
Amersfoort, Grenoble, France
Memphis and Nashville, The Netherlands
Tennessee Haifa, Israel
Barcelona, Spain
Austin, Texas Tokyo, Japan
Bristol, United Kingdom
Chester, Richmond and Bristol, United Kingdom
Sandston, Virginia
ITEM 3. LEGAL PROCEEDINGS.
HP is involved in lawsuits, claims, investigations and proceedings,
including patent, commercial and environmental matters, which arise in the
ordinary course of business. There are no such matters pending that HP expects
to be material in relation to its business, financial condition or results of
operations.
HP is party to, or otherwise involved in, proceedings brought by federal or
state environmental agencies under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), known as "Superfund," or state laws
similar to CERCLA.
We are also conducting environmental investigations or remediations at
several of our current or former operating sites pursuant to administrative
orders or consent agreements with state environmental agencies. Any liability
from such proceedings, in the aggregate, is not expected to be material to the
operations or financial position of HP.
In November 1999, in settlement of an administrative complaint filed in 1998
that alleged violations of the Toxic Substances Control Act ("TSCA"), HP entered
into a consent agreement with the United States Environmental Protection Agency
(the "Agency") under which we agreed to pay a civil penalty of $112,500, to have
a ten-month post-enforcement audit of specified operations conducted by a third
party and to pay civil penalties in stipulated amounts for any violations that
may be discovered in that audit. The audit is currently scheduled to be
completed in early 2001, by agreement with the Agency. Under the terms of the
consent agreement, stipulated penalties imposed under that agreement may not
exceed $600,000.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Information regarding the market prices of HP's common stock and the markets
for that stock may be found in the "Quarterly Summary" in Item 8 below and the
cover page of this Form 10-K, which are incorporated herein by reference,
respectively. We have paid cash dividends each year since 1965. The current rate
is $0.08 per share per quarter. As of November 30, 2000, there were
approximately 122,000 shareholders of record. Additional information concerning
dividends may be found in the following sections of this Form 10-K, which are
incorporated herein by reference: "Selected Financial Data" in Item 6 below and
"Consolidated Statement of Cash Flows," "Consolidated Statement of Stockholders'
Equity" and "Quarterly Summary" in Item 8 below.
ITEM 6. SELECTED FINANCIAL DATA.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
SELECTED FINANCIAL DATA(1)
FOR THE YEARS ENDED OCTOBER 31
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2000 1999 1998 1997 1996
- ------------------------------------- -------- -------- -------- -------- --------
Net revenue.................................... $48,782 $42,370 $39,419 $35,465 $31,613
Earnings from operations(2).................... 3,889 3,688 3,399 3,405 2,926
Net earnings from continuing operations........ 3,561 3,104 2,678 2,515 2,085
Net earnings per share, continuing
operations(3)
Basic........................................ $ 1.80 $ 1.54 $ 1.29 $ 1.23 $ 1.02
Diluted...................................... 1.73 1.49 1.26 1.19 0.99
Cash dividends declared per share(3)........... 0.32 0.32 0.30 0.26 0.22
At year-end:
Assets--Continuing operations................ $34,009 $31,764 $28,624 $26,681 $22,934
Assets--Total(4)............................. 34,009 35,297 31,708 29,852 25,977
Long-term debt............................... 3,402 1,764 2,063 3,158 2,579
- ------------------------
(1) HP's consolidated financial statements and notes for all periods present
Agilent Technologies, Inc.'s businesses as a discontinued operation through
the spin-off date of June 2, 2000. See further discussion in Notes to the
Consolidated Financial Statements in Item 8 below.
(2) Earnings from operations represent earnings before net interest income and
other, interest expense, provision for taxes and net earnings from
discontinued operations.
(3) All per-share amounts reflect the retroactive effects of all stock splits
including the two-for-one stock split in the form of a stock dividend
effective October 27, 2000.
(4) Total Assets includes assets from continuing operations and the net assets
of discontinued operations through the Agilent Technologies Inc.'s spin-off
date of June 2, 2000.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES THAT APPEAR ELSEWHERE IN THIS
DOCUMENT.
As more fully discussed in Note 3 to the Consolidated Financial Statements
in Item 8 below, on March 2, 1999, we announced our intention to launch a new
company, subsequently named Agilent Technologies, Inc. ("Agilent Technologies"),
through a distribution of Agilent Technologies common stock to our stockholders
in the form of a tax-free spin-off. Agilent Technologies is composed of HP's
former Measurement Organization, which included the test and measurement,
semiconductor products, chemical analysis and healthcare solutions businesses.
Effective July 31, 1999, HP's management and Board of Directors completed the
plan of disposition for Agilent Technologies. In November 1999, Agilent
Technologies completed an initial public offering of approximately 16% of its
common stock. We distributed substantially all of our remaining interest in
Agilent Technologies through a stock dividend to our stockholders on June 2,
2000, resulting in the elimination of the net assets of discontinued operations
and a $4.2 billion reduction of retained earnings. Our consolidated financial
statements for all periods present Agilent Technologies as a discontinued
business segment through the spin-off date of June 2, 2000 in accordance with
Accounting Principles Board ("APB") Opinion No. 30. Unless otherwise indicated,
the following discussion relates to HP's continuing operations.
RESULTS OF OPERATIONS
OVERVIEW
The following is a summary of operating results at the HP consolidated
level. This discussion is followed by a more detailed discussion of operating
results by segment.
HP reported net revenue growth of 15% in 2000, following growth of 7% in
1999. In 2000, we experienced strong market acceptance of our home and notebook
PCs, printing supplies, UNIX-Registered Trademark- servers, and imaging devices.
This growth was partially offset by the continued transition to a new enterprise
storage strategy, softening demand in the business desktop PC and business
printer markets, and unfavorable foreign currency effects. Dollar revenue and
gross margin growth were also constrained by lower average selling prices and a
shift to the low-end in many product categories. However, operating expenses as
a percentage of net revenue decreased by 0.6 percentage points in 2000 compared
to 1999 due to improved operational efficiencies. Interest income and other,
net, increased by 40% primarily as a result of non-operational gains, including
gains from divestitures of non-strategic portions of our business. As a result,
net earnings from continuing operations as a percentage of net revenue in fiscal
2000 was comparable to fiscal 1999. Net earnings from continuing operations
increased 15% in 2000 compared to a 16% increase in 1999.
Costs, expenses and earnings as a percentage of net revenue were as follows
for the years ended October 31:
2000 1999 1998
-------- -------- --------
Cost of products sold and services.......................... 71.5% 70.1% 70.5%
Research and development.................................... 5.4% 5.8% 6.0%
Selling, general and administrative......................... 15.1% 15.4% 14.8%
Earnings from operations.................................... 8.0% 8.7% 8.6%
Net earnings from continuing operations..................... 7.3% 7.3% 6.8%
13
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET REVENUE
Net revenue growth of 15% in fiscal 2000 resulted primarily from strong
performance in the Computing Systems and Imaging and Printing Systems segments,
while the 7% revenue growth in 1999 was driven by growth in Imaging and Printing
Systems. Overall, both product sales and service revenue for the fiscal year
increased 15% over 1999. Product sales for fiscal 1999 increased 7% over 1998,
while service revenue grew 9% over the same period. U.S. revenue in 2000
increased 14% over 1999 to $21.6 billion. International revenue in 2000 grew 16%
overall to $27.2 billion, largely driven by economic improvement in Asia. In
1999, U.S. revenue increased 6% and international revenue increased 9% compared
to 1998. Fluctuations in currency rates adversely impacted revenue growth for
the company as a whole by approximately 2.0 percentage points in fiscal 2000 due
mainly to the weakening of the Euro, while currency fluctuations had a minimal
impact on revenue growth in 1999.
COST OF PRODUCTS SOLD AND COST OF SERVICES
Cost of products sold and services, as a percentage of net revenue was 71.5%
in fiscal 2000, compared with 70.1% in 1999 and 70.5% in 1998. The
1.4 percentage point increase in the cost of sales percentage in fiscal 2000
versus 1999 resulted primarily from increases in cost of sales for the Computing
Systems segment. The decline in the 1999 cost of sales percentage versus 1998
was attributable to gross margin improvements in Computing Systems, partially
offset by an increase in cost of sales in the IT Services segment. We expect
cost of products sold and services as a percentage of net revenue to increase in
the future due to continued competitive pricing pressures and changes in product
mix.
OPERATING EXPENSES
Total operating expenses, composed of research and development and selling,
general and administrative expenses, increased 12% and 9% in 2000 and 1999 when
compared to 1999 and 1998, respectively. In fiscal 1999, hiring controls
implemented in 1998 and increased use of outsourcing, where appropriate and cost
effective, had a favorable impact on operating expense growth.
Research and development expense grew 8% in fiscal 2000 compared to 1999 and
3% in 1999 when compared to 1998. In both fiscal 2000 and 1999, growth in
research and development expense was due primarily to an increase in spending
that reflects our continuing investment in the design and development of new
technologies in computing systems and imaging and printing systems.
Selling, general and administrative expenses increased 13% in 2000 compared
to 1999 and 11% in 1999 when compared to 1998. The selling, general and
administrative expenses growth rate in 1999 was 10%, after adjusting for costs
related to the Agilent Technologies spin-off which were included in HP's
continuing operations. These costs consisted of spin-off expenses incurred prior
to the July 31, 1999 measurement date for discontinued operations accounting and
other expenses composed primarily of retention incentives given to continuing HP
employees involved in effecting the spin-off. In both 2000 and 1999, the growth
was due primarily to increased selling costs to support business growth as well
as increased marketing expenses from the continued introduction of new products
and to support our e-services strategy. In fiscal 2000, we also incurred
additional marketing expenses to support our corporate branding initiative.
14
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST INCOME AND OTHER, NET
Interest income and other, net, increased $285 million in fiscal 2000 versus
1999, following a $178 million increase in 1999 when compared to 1998. The
increase in fiscal 2000 was primarily attributable to gains on divestitures of
non-strategic businesses, an increase in interest income due to higher average
cash and investment balances, and gains on the sale of equity securities offset
by losses on certain investments in emerging market companies. As a result of
current market conditions, we may incur additional charges on our investments in
emerging market companies in the future. The increase in fiscal 1999 was due
mainly to an increase in interest income resulting from higher average cash and
investment balances.
TAXES
HP's tax rate was 23.0% in 2000, 26.0% in 1999 and 27.5% in 1998. The
year-to-year decreases were primarily the result of changes in the mix of our
pre-tax earnings in various tax jurisdictions throughout the world.
NET EARNINGS FROM CONTINUING OPERATIONS
As reported, net earnings from continuing operations increased 15% to
$3.6 billion in 2000, compared to a 16% increase to $3.1 billion in 1999. As a
percentage of net revenue, net earnings from continuing operations were 7.3% in
both fiscal 2000 and 1999, and 6.8% in 1998.
NET EARNINGS FROM DISCONTINUED OPERATIONS
In the second quarter of fiscal 2000, the cumulative net earnings of Agilent
Technologies since the July 31, 1999 measurement date began to exceed the total
estimated net costs to effect the spin-off. Net earnings from discontinued
operations for fiscal 2000 were $136 million. Of this $136 million, net earnings
of Agilent Technologies for the period from July 31, 1999 through the June 2,
2000 spin-off date totaled $287 million (net of related tax expense of
$174 million), and the net costs to effect the spin-off were $151 million (net
of related tax benefit of $23 million). Net earnings from discontinued
operations for fiscal years 1999 and 1998 consisted only of the net earnings of
Agilent Technologies. See Note 3 to the Consolidated Financial Statements in
Item 8 below for further discussion.
SEGMENT INFORMATION
The following is a discussion of operating results for each of HP's business
segments. A description of products and services as well as financial data for
each segment can be found in Note 16 to the Consolidated Financial Statements in
Item 8 below. The financial data for fiscal years 1999 and 1998 have been
restated to reflect changes in HP's organizational structure that occurred
during fiscal year 2000. These changes are more fully described in Note 16 to
the Consolidated Financial Statements in Item 8 below. The reportable segments
disclosed in this document are based on our management organizational structure
as of October 31, 2000. Future changes to this organizational structure may
result in changes to the reportable segments disclosed.
15
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IMAGING AND PRINTING SYSTEMS
YEARS ENDED OCTOBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN MILLIONS)
Net revenue................................................. $20,476 $18,550 $16,709
Earnings from operations.................................... $ 2,746 $ 2,335 $ 2,043
Imaging and Printing Systems' net revenue grew 10% in fiscal 2000 from 1999,
following an 11% increase in 1999 when compared to 1998. Net revenue growth in
both years was driven primarily by strong sales of printer supplies. Fiscal 2000
revenues also benefited from growth in imaging devices, partially offset by a
decline in business printer sales. Overall, unfavorable foreign currency
effects, particularly in Europe, moderated the segment's revenue growth in
fiscal 2000. In addition to strong performance in supplies, the increase in
fiscal 1999 revenues was attributable to growth in home printers. Overall,
despite strong unit growth across many product categories in both years, dollar
growth was constrained by declines in average selling prices and shifts to
low-end products.
Net revenue growth in printer supplies in both years reflected continued
expansion in the installed base. The fiscal 2000 revenue growth in imaging
devices was fueled by excellent unit growth from newly introduced products
within all-in-one products and Photosmart printers and cameras. The increase in
imaging revenues was partially offset by planned pricing declines in all-in-one
products and a shift to lower-priced scanners. A softening of demand in the
business printer market further moderated fiscal 2000 revenues. Within this
category, there was strong growth in color laser printers; however, this growth
did not fully offset the impact of an expected decline in monochrome laser
sales. In addition to strong sales in supplies in fiscal 1999, home printers
benefited from positive acceptance of newly introduced low-end desktop printers,
while color lasers made solid inroads in the business printer category. Higher
unit shipments of new products drove the increase in scanning devices in fiscal
1999, despite a sharp decline in average selling prices.
Earnings from operations as a percentage of net revenue was 13.4% in 2000,
compared to 12.6% in 1999 and 12.2% in 1998. In 1998, Imaging and Printing
Systems incurred approximately $120 million of charges primarily for voluntary
employee severance programs and fixed asset write-downs related to outsourcing
certain production operations. The decision to outsource these operations was
made to provide flexibility in manufacturing in the future. Adjusting for these
charges, earnings from operations as a percentage of net revenue would have been
12.9% in 1998.
The earnings from operations ratio improved by 0.8 percentage points in
fiscal year 2000 compared to 1999. This improvement reflected strong operating
expense management, offset by a slight decline in the overall gross margin. This
margin decline was attributable to a shift toward lower-margin home printers and
imaging devices, as well as higher component costs related to the strong
Japanese yen. However, this negative impact on gross margins was almost fully
offset by favorable gross margins in printer supplies due to economies of scale
from increased production levels. The adjusted 0.3 percentage point decline in
the fiscal year 1999 earnings from operations ratio compared to 1998 resulted
primarily from gross margin declines. These margin declines were due to higher
component costs attributable to the strengthening Japanese yen and a shift
toward lower-margin business printers. This decrease in gross margins was
partially offset by strong sales of higher-margin printer supplies. In fiscal
1999, earnings from operations as a percentage of net revenue was impacted
favorably by strong operating expense management; however, this positive impact
was offset by investments made to develop next generation technologies and
additional selling and marketing expenses to promote new imaging and printing
products.
16
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
COMPUTING SYSTEMS
YEARS ENDED OCTOBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN MILLIONS)
Net revenue................................................. $21,095 $17,814 $17,315
Earnings from operations.................................... $ 960 $ 850 $ 480
Computing Systems' net revenue increased 18% in fiscal 2000, following a 3%
increase in 1999 when compared to 1998. Strong performance in home and notebook
PCs and solid sales in UNIX-Registered Trademark- server products drove the
overall revenue growth in 2000. This revenue growth was moderated in part by the
continued transition to a new enterprise storage strategy and declining revenue
performance in business desktop PCs. In 1999, strong unit shipments of PC and
information storage products fueled revenue growth. Revenue growth in 1999 was
partially offset by declines in the average selling prices as a result of
actions designed to maintain market share. In addition,
UNIX-Registered Trademark- server and enterprise storage revenue in 1999 was
impacted unfavorably by the change in high-end storage strategy and certain
product transitions.
In fiscal 2000, Computing Systems' revenue growth reflected very strong unit
shipments of home and notebook PCs which was partially offset by lower average
selling prices as a result of competitive pressures. Growth in home PCs was
driven by favorable acceptance of new products aided by the exit of two major
competitors from the retail market. Notebook PCs continued to benefit from
strong sales of the base portfolio as well as introduction of the retail
notebook line. In addition, excellent performance in both the entry-level and
mid-range UNIX-Registered Trademark- servers resulted from increased unit sales
and higher average selling prices due to richer product configurations. High-end
UNIX-Registered Trademark- servers, however, exhibited some weakness in 2000,
attributable primarily to customer anticipation of the new high-end server
introduced in the fourth quarter of 2000. Revenue growth in fiscal 2000 was
impacted unfavorably by declining revenue performance in business desktop PCs
resulting from component shortages and lower average selling prices. Moreover,
the continued transition to a new enterprise storage strategy had a negative
effect on fiscal 2000, although enterprise storage revenues experienced
accelerating growth in the second half of the year. In fiscal 1999, Computing
Systems' revenue growth benefited from strong unit shipments of home PCs,
information storage products, notebook PCs, and high-end
UNIX-Registered Trademark- servers. However, weakness in the sales of low-end
and mid-range UNIX-Registered Trademark- servers due to product transitions,
falling average selling prices, and a transition to a new high-end storage
strategy had a moderating impact on overall revenue growth in 1999.
Earnings from operations as a percentage of net revenue was 4.6% in 2000,
compared to 4.8% in 1999 and 2.8% in 1998. The slight decrease in the earnings
from operations ratio for 2000 is attributable to higher memory costs, as well
as a shift to lower-margin products and declining average selling prices,
particularly in home and notebook PCs. This margin decline was partially offset
by a shift to higher-margin UNIX-Registered Trademark- server and enterprise
storage products. In addition, operating expenses as a percentage of net revenue
decreased from 1999 due to improved operational efficiencies. The
2.0 percentage point increase in the earnings from operations ratio for 1999
compared to 1998 reflected favorable component prices, improved PC inventory
management, and a shift towards higher-margin enterprise storage products. This
was moderated in part by declining average selling prices and a shift to low-end
PC products. Expense controls implemented during the second half of 1998 and
improved operational efficiencies also had a favorable impact on the earnings
from operations ratio in 1999.
17
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IT SERVICES
YEARS ENDED OCTOBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN MILLIONS)
Net revenue................................................. $7,129 $6,255 $5,685
Earnings from operations.................................... $ 634 $ 575 $ 748
IT Services' net revenue increased 14% in fiscal 2000 versus 1999, following
a 10% increase in 1999 compared to 1998. The increase in net revenue was driven
by continued growth in customer support as well as strong performance in
consulting services and HP's financing business. Support revenues continued to
benefit from strength in mission critical and networking services, despite
competitive pricing pressures. Growth in consulting reflected strong demand for
communications solutions, implementation of Enterprise Resource Planning ("ERP")
and Customer Relationship Management ("CRM") applications, and new e-services
software development. IT Services' overall growth in fiscal 2000 reflected
strength in the UNIX-Registered Trademark- business through an increase in
support contracts and customer financing arrangements. Overall growth also was
impacted favorably by increased revenues from sales of complementary third party
products delivered with sales of HP solutions. In fiscal 1999, strong growth in
support revenue and outsourcing services was moderated by lower growth rates in
consulting and financing. Support revenue reflected the strong performance of
mission critical and networking services. The financing business was unfavorably
impacted by lower rental starts and a more competitive
UNIX-Registered Trademark- environment.
Earnings from operations as a percentage of net revenue was 8.9% in 2000,
compared to 9.2% in 1999 and 13.2% in 1998. The decline in the earnings from
operations ratio in fiscal 2000 was due to increases in operating expenses as a
percentage of net revenue partially offset by gross margin improvements.
Operating expenses increased due to bad debt write-offs in our financing
portfolio and higher marketing expense to support HP's corporate branding
initiative. Gross margin improvements were achieved in our services business,
resulting primarily from improved engagement cost management and consolidation
of data centers in outsourcing. These margin increases were partially offset by
lower margins on our complementary products business and an increase in hiring
in our support business in anticipation of future growth.
The decrease in the fiscal 1999 earnings from operations ratio reflected
lease portfolio recoverability costs related primarily to the transition to a
new high-end enterprise storage strategy. Reduced profitability attributable to
slower growth of new services, competitive pricing, and an increase in headcount
in our services businesses to support future growth also negatively impacted
earnings from operations as a percentage of net revenue. In addition, operating
expenses increased in 1999 versus 1998 as a result of investment in service and
support technologies and marketing expenses related to HP's e-services
initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Our financial position remained strong throughout 2000, as cash and cash
equivalents and short-term investments were $4.0 billion at October 31, 2000
compared to $5.6 billion at October 31, 1999. During fiscal 2000, cash flows
from operating activities and net proceeds from divestitures of non-strategic
portions of our business were used to fund repurchases of HP's common stock and
purchases of property, plant and equipment.
18
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating activities generated $3.5 billion of cash in 2000, compared to
$3.1 billion in 1999 and $4.8 billion in 1998. The increase in cash generated
from operations in 2000 was due mainly to timing of tax payments and accounts
payable offset by increases in inventory and other assets. The decrease in cash
generated from operations in 1999 compared to 1998 resulted primarily from
timing of tax payments and higher investments in receivables and inventories due
to growth.
Inventory as a percentage of net revenue was 11.7% in 2000, comparable to
11.5% in 1999. The inventory ratio was very stable in both years, reflecting
solid supply chain management. Accounts and financing receivables as a
percentage of net revenue were 17.6% in 2000 and 18.5% in 1999.
Capital expenditures were $1.7 billion in 2000, compared to $1.1 billion in
1999 and $1.6 billion in 1998. Net property, plant and equipment as a percentage
of net revenue was 9.2% in 2000 compared to 10.2% in 1999. This decline reflects
our continuing effort to streamline operations through outsourcing and
consolidating activities, improving space utilization and reducing asset
intensity to build flexibility into our balance sheet.
We invest excess cash in short- and long-term investments, depending on our
projected cash needs for operations, capital expenditures and other business
purposes. We also supplement our internally generated cash flow with a
combination of short- and long-term borrowings. The increase in long-term
borrowings in 2000 is due primarily to the issuance of $1.5 billion of Global
Notes described below. Maturities of long-term debt totaling $0.5 billion were
repaid as scheduled in 2000. Short-term borrowings increased in 1999 due to the
use of short-term debt to meet short-term working capital requirements.
Maturities of long-term debt of $1.0 billion were repaid as scheduled in 1999.
At October 31, 2000, we had an unused committed borrowing facility in place
totaling $1.0 billion.
In February 2000, we filed a shelf registration statement with the
Securities and Exchange Commission ("SEC") to register $3.0 billion of debt
securities, common stock, preferred stock, depositary shares and warrants. This
registration statement was declared effective on March 17, 2000. On June 6,
2000, we offered under the registration statement $1.5 billion of unsecured
7.15% Global Notes which mature June 15, 2005, unless previously redeemed. This
offering closed on June 9, 2000. The net proceeds from the sale of the notes
were used for general corporate purposes, which included repayment of existing
indebtedness, capital expenditures and working capital needs. We have the
capacity to issue an additional $1.5 billion of securities under the shelf
registration statement.
We repurchase shares of our common stock under a systematic program to
manage the dilution created by shares issued under employee stock plans and
under a separate incremental plan authorizing purchases in the open market or in
private transactions. In fiscal 2000, we repurchased 96,978,000 shares under
these plans for an aggregate price of $5.6 billion. In 1999, we repurchased
62,084,000 shares under these plans for $2.6 billion. The share repurchase
amounts for fiscal 2000 and 1999 have been adjusted to reflect the two-for-one
stock split in the form of a stock dividend, effective October 27, 2000,
discussed in Note 12 to the Consolidated Financial Statements in Item 8 below.
During 2000, HP's Board of Directors authorized an additional $5.0 billion of
future repurchases under these two programs in the aggregate. As of October 31,
2000, we had authorization for remaining future repurchases under the two
programs of approximately $0.9 billion. In November 2000, the Board of Directors
authorized an additional $2.0 billion in future repurchases under the plans,
resulting in remaining authorized repurchases totaling $2.9 billion.
In December 2000, the Board of Directors authorized a repurchase program for
our zero-coupon subordinated convertible notes. Under the repurchase program, we
may repurchase the notes from time to time at varying prices. As of January 19,
2001, we had repurchased approximately $600 million in face
19
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
value of the notes, resulting in a gain on the early extinguishment of debt of
approximately $36 million before taxes.
In November 1999, Agilent Technologies completed an initial public offering
of approximately 16% of its common stock and distributed the net proceeds of
approximately $2.1 billion to HP. We provided initial funding in November 1999
to Agilent Technologies and retained certain assets and liabilities of Agilent
Technologies as of November 1, 1999, which were subsequently liquidated. The
aggregate impact of these transactions resulted in cash flows from discontinued
operations of approximately $1.0 billion and an increase in additional
paid-in-capital of approximately $1.3 billion. We distributed substantially all
of our remaining interest in Agilent Technologies through a stock dividend to HP
stockholders on June 2, 2000, resulting in the elimination of the net assets of
discontinued operations and a $4.2 billion reduction of retained earnings.
FACTORS THAT COULD AFFECT FUTURE RESULTS
COMPETITION
We encounter aggressive competition in all areas of our business. We have
numerous competitors, ranging from some of the world's largest corporations to
many relatively small and highly specialized firms. We compete primarily on the
basis of technology, performance, price, quality, reliability, distribution,
customer service and support. Product life cycles are short. To remain
competitive, we must be able to develop new products, services and support, as
well as periodically enhance our existing products, services and support. In
particular, we anticipate that we will have to continue to lower the prices of
many of our products, services and support to stay competitive and effectively
manage financial returns with resulting reduced gross margins. In some of our
markets, we may not be able to compete successfully against current and future
competitors, and the competitive pressures we face could harm our business and
prospects.
NEW PRODUCT AND SERVICE INTRODUCTIONS
If we cannot continue to rapidly develop, manufacture and market innovative
products and services that meet customer requirements for performance and
reliability, we may lose market share and our future revenue and earnings may
suffer. The process of developing new high technology products and services is
complex and uncertain. We must accurately anticipate customers' changing needs
and emerging technological trends. We consequently must make long-term
investments and commit significant resources before knowing whether our
predictions will eventually result in products that the market will accept.
After a product is developed, we must be able to manufacture sufficient volumes
quickly at low enough costs. To do this we must accurately forecast volumes, mix
of products and configurations. Additionally, the supply and timing of a new
product or service must match customers' demand and timing for the particular
product or service. Given the wide variety of systems, products and services
that HP offers, the process of planning production and managing inventory levels
becomes increasingly difficult.
RELIANCE ON THIRD PARTY DISTRIBUTION CHANNELS AND INVENTORY MANAGEMENT
We use third-party distributors to sell our products, especially printers
and personal computers, in order to accommodate changing customer preferences.
As a result, the financial soundness of our wholesale and retail distributors,
and our continuing relationships with these distributors, are important to HP's
success. Some of these distributors may have insufficient financial resources
and may not be able to withstand changes in business conditions. Our revenue and
earnings could suffer if our distributors' financial condition or operations
weaken or if our relationships with them deteriorate.
20
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Additionally, inventory management becomes increasingly complex as we
continue to sell a significant mix of products through distributors. Third party
distributors constantly adjust their product orders from us in response to:
- The supply of our and our competitors' products available to the
distributor,
- The timing of new product introductions and relative features of the
products, and
- Seasonal fluctuations in end-user demand, such as back-to-school and
holiday buying.
Distributors may increase orders during times of product shortages, cancel
orders if their inventory is too high, or delay orders in anticipation of new
products. If we have excess inventory, we may have to reduce our prices and
write down inventory, which in turn could result in lower gross margins.
SHORT PRODUCT LIFE CYCLES
The short life cycles of many of our products pose a challenge for us to
manage effectively the transition from existing products to new products. If we
do not manage the transition effectively, our revenue and earnings could suffer.
Among the factors that make a smooth transition from current products to new
products difficult are delays in product development or manufacturing,
variations in product costs and delays in customer purchases of existing
products in anticipation of new product introductions. Our revenue and earnings
could also suffer due to the timing of product or service introductions by our
suppliers and competitors. This is especially true when a competitor introduces
a new product just before our own product introduction. Furthermore, our new
products may replace or compete with a certain number of our own current
products.
INTELLECTUAL PROPERTY
We generally rely upon patent, copyright, trademark and trade secret laws in
the U.S. and in certain other countries, and agreements with our employees,
customers and partners, to establish and maintain our proprietary rights in our
technology and products. However, any of our intellectual proprietary rights
could be challenged, invalidated or circumvented. Our intellectual property may
not necessarily provide significant competitive advantages. Also, because of the
rapid pace of technological change in the information technology industry, many
of our products rely on key technologies developed by third parties, and we may
not be able to continue to obtain licenses from these third parties. Third
parties may claim that we are infringing their intellectual property. Even if we
do not believe that our products are infringing third parties' intellectual
property rights, the claims can be time-consuming and costly to defend and
divert management's attention and resources away from our business. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements. If we cannot or do not license the infringed
technology or substitute similar technology from another source, our business
could suffer.
RELIANCE ON SUPPLIERS
Our manufacturing operations depend on our suppliers' ability to deliver
quality components and products in time for us to meet critical manufacturing
and distribution schedules. We sometimes experience a short supply of certain
component parts as a result of strong demand in the industry for those parts. If
shortages or delays persist, our operating results could suffer until other
sources can be developed. In order to secure components for the production of
new products, at times we make advance payments to suppliers, or we may enter
into non-cancelable purchase commitments with vendors. If the prices of these
component parts then decrease after we have entered into binding price
agreements, our earnings could suffer. Furthermore, we may not be able to secure
enough components at reasonable prices to build new
21
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
products in a timely manner in the quantities and configurations needed.
Conversely, a temporary oversupply of these parts also could adversely affect
our operating results.
INTERNATIONAL
Sales outside the U.S. make up more than half of our revenues. A portion of
our product and component manufacturing, along with key suppliers, are also
located outside of the U.S. Our future earnings or financial position could be
adversely affected by a variety of international factors, including:
- Changes in a country's or region's political or economic conditions,
- Trade protection measures,
- Import or export licensing requirements,
- The overlap of different tax structures,
- Unexpected changes in regulatory requirements,
- Differing technology standards,
- Problems caused by the conversion of various European currencies to the
Euro (see "Adoption of the Euro" section below), and
- Natural disasters.
MARKET RISK
We are exposed to foreign currency exchange rate risk inherent in our sales
commitments, anticipated sales and assets and liabilities denominated in
currencies other than the U.S. dollar. We are also exposed to interest rate risk
inherent in our debt and investment portfolios. Our risk management strategy
uses derivative financial instruments, including forwards, swaps and purchased
options, to hedge certain foreign currency and interest rate exposures. Our
intent is to offset gains and losses that occur on the underlying exposures,
with gains and losses on the derivative contracts hedging these exposures. We do
not enter into derivatives for trading purposes. We are also exposed to equity
securities price risk on our portfolio of marketable equity securities. We
typically do not attempt to reduce or eliminate our market exposure on these
securities. See also Notes 4 and 11 to the Consolidated Financial Statements in
Item 8 below for more detailed information.
We have performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in foreign exchange rates applied to the hedging contracts and
underlying exposures described above, and a hypothetical 10% adverse movement in
interest rates applied to our debt and investment portfolios. As of October 31,
2000 and 1999, the analysis indicated that these hypothetical market movements
would not have a material effect on our consolidated financial position, results
of operations or cash flows. Actual gains and losses in the future may differ
materially from that analysis; however, based on changes in the timing and
amount of interest rate and foreign currency exchange rate movements and our
actual exposures and hedges.
IMPAIRMENT OF INVESTMENT AND FINANCING PORTFOLIOS
We have an investment portfolio which includes minority equity and debt
investments in numerous technology companies. In particular, we have invested in
various privately held companies, many of which are still in the start-up or
development stage. These investments are inherently risky because the markets
for the technologies or products they have under development are typically in
the early stages and may never develop. Furthermore, the values of our
investments in publicly-traded companies are subject to
22
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
significant market price volatility. We may incur losses related to our
investments in these companies. Our investments in technology companies are
often coupled with a strategic commercial relationship. Our commercial
agreements with these companies may not be sufficient to allow us to obtain and
integrate such products or technology into our technology or product lines, and
these companies may be subsequently acquired by third parties, including
competitors of ours.
Moreover, we often provide financing for the purchase of our products and
services to technology companies. Due to the recent economic downturn,
particularly in the U.S., and difficulties that may be faced by some of these
companies, our financing portfolio could be further impaired.
ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES
In the normal course of business, we frequently engage in discussions with
third parties relating to possible acquisitions, strategic alliances, joint
ventures and divestitures. Although completion of any one transaction may not
have a material effect on our financial position, results of operations or cash
flows taken as a whole, it may contribute to our financial results differing
from the investment community's expectations in a given quarter. Divestiture of
a part of our business may result in the cancellation of orders and charges to
earnings. Acquisitions and strategic alliances may require us to integrate with
a different company culture, management team and business infrastructure. We may
also have to develop, manufacture and market products with our products in a way
that enhances the performance of the combined business or product line.
Depending on the size and complexity of an acquisition, our successful
integration of the entity into HP depends on a variety of factors, including:
- The hiring and retention of key employees,
- Management of facilities and employees in separate geographic areas, and
- The integration or coordination of different research and development and
product manufacturing facilities.
All of these efforts require varying levels of management resources, which
may divert our attention from other business operations.
EARTHQUAKES AND POWER OUTAGES
Our corporate headquarters, a portion of our research and development
activities, other critical business operations and a certain number of our
suppliers are located in California. The ultimate impact on HP, our significant
suppliers and our general infrastructure of being located near major earthquake
faults is unknown, but operating results could be materially adversely affected
in the event of a major earthquake. In addition, California has recently
experienced ongoing power shortages, which have resulted in "rolling blackouts."
These blackouts could cause disruptions to our operations and the operations of
our suppliers, distributors and resellers, and customers. We are predominantly
uninsured for losses and interruptions caused by earthquakes and power outages.
ENVIRONMENTAL
Some of our operations use substances regulated under various federal, state
and international laws governing the environment. It is our policy to apply
strict standards for environmental protection to sites inside and outside the
U.S., even when not subject to local government regulations. We record a
liability for environmental remediation and related costs when we consider the
costs to be probable and the amount of the costs can be reasonably estimated.
Environmental costs are presently not material to our results of operations or
financial position.
23
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
PROFIT MARGIN
Our profit margins vary somewhat among our products, customer groups and
geographic markets. Consequently, our overall profitability in any given period
is partially dependent on the product, customer and geographic mix reflected in
that period's net revenue.
STOCK PRICE
HP's stock price, like that of other technology companies, can be volatile.
Some of the factors that can affect our stock price are:
- Our, or a competitor's, announcement of new products, services or
technological innovations,
- Quarterly increases or decreases in our earnings,
- Changes in revenue or earnings estimates by the investment community, and
- Speculation in the press or investment community about our financial
condition or results of operations.
General market conditions and domestic or international macroeconomic
factors unrelated to our performance may also affect our stock price. For these
reasons, investors should not rely on recent trends to predict future stock
prices or financial results. In addition, following periods of volatility in a
company's securities, securities class action litigation against a company is
sometimes instituted. This type of litigation could result in substantial costs
and the diversion of management time and resources.
ECONOMIC UNCERTAINTY
The revenue growth and profitability of our business depends significantly
on the overall demand for computing and imaging products and services,
particularly in the product and service segments in which we compete. Softening
demand for these products and services caused by worsening economic conditions
may result in decreased revenues or earnings levels or growth rates. Recently,
the U.S. economy has weakened. This has resulted in individuals and companies
delaying or reducing expenditures, such as for information technology.
HP has reported that, based on worsening economic conditions and a decrease
in corporate and consumer information technology spending, primarily in the
U.S., HP expects to achieve slower revenue growth rates for the first half of
fiscal year 2001 and earnings per share below previous estimates for the first
quarter of fiscal year 2001. Further delays or reductions in information
technology spending could have a material adverse effect on demand for our
products and services, and consequently on our business, operating results,
financial condition, prospects and stock price.
EARNINGS FLUCTUATIONS
Although we believe that we have the products and resources needed for
continuing success, we cannot reliably predict future revenue and margin trends.
Actual trends may cause us to adjust our operations, which could cause
period-to-period fluctuations in our earnings.
SPIN-OFF OF AGILENT TECHNOLOGIES
On June 2, 2000, we distributed to our stockholders of record as of the
close of business on May 2, 2000, substantially all of the common stock of
Agilent Technologies owned by HP. We may not obtain the benefits we expect as a
result of this distribution, such as greater strategic focus on our core
computing and imaging and printing businesses.
24
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In conjunction with the spin-off of Agilent Technologies, we entered into
transitional service agreements with Agilent Technologies to support ongoing
operations of Agilent Technologies relating to certain administrative processes.
These transitional service agreements generally have terms of two years or less
following the spin-off. As each of these service agreements expires, the fees
and cost reimbursements currently being paid to us by Agilent Technologies for
the associated services will also cease.
ADOPTION OF THE EURO
We had established a dedicated task force to address the issues raised by
the introduction of a European single currency, the Euro. The Euro's initial
implementation was effective as of January 1, 1999, and the transition period
will continue through January 1, 2002. On January 1, 1999, we began converting
our product prices from local currencies to Euros as required. We implemented
system changes to give multi-currency capability to internal applications and to
ensure that external partners' systems processing Euro conversions are compliant
with the European Council regulations. In addition, we have implemented design
changes to support display and printing of the Euro character by impacted HP
products.
The introduction and use of the Euro has not had a material effect on our
foreign exchange and hedging activities or our use of derivative instruments,
and we do not presently expect that it will. All costs associated with the
conversion to the Euro are expensed to operations as incurred. While we will
continue to evaluate the impact of the Euro over time, based on currently
available information, we do not believe that the introduction of the Euro
currency will have a material adverse impact on our consolidated financial
condition, cash flows or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives as assets or liabilities in the statement of
financial position and measurement of those instruments at fair value.
Derivatives that are not hedges must be adjusted to fair value through earnings.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value will be either offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings, or recognized in
other comprehensive income until the hedged item is recognized in earnings. HP
adopted the standard on November 1, 2000, and the adoption did not materially
impact our consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." This bulletin summarizes certain
of the SEC's views in applying accounting principles generally accepted in the
U.S. to revenue recognition in financial statements. Based on the SEC's latest
timeline for implementing SAB 101, HP would be required to comply with the
guidelines in the fourth quarter of fiscal year 2001. Accordingly, we are
continuing to evaluate the potential impact that adoption will have on our
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For quantitative and qualitative disclosures about market risk affecting HP,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Factors That Could Affect Future Results--Market Risk" in Item 7
above, which is incorporated herein by reference.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
TABLE OF CONTENTS
Report of Independent Auditors.............................. 27
Report of Independent Accountants........................... 28
Consolidated Statement of Earnings.......................... 29
Consolidated Balance Sheet.................................. 30
Consolidated Statement of Cash Flows........................ 31
Consolidated Statement of Stockholders' Equity.............. 32
Notes to Consolidated Financial Statements.................. 33
Quarterly Summary........................................... 60
26
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
HEWLETT-PACKARD COMPANY
We have audited the accompanying consolidated balance sheet of
Hewlett-Packard Company and subsidiaries as of October 31, 2000, and the related
consolidated statements of earnings, stockholders' equity and cash flows for the
year then ended. Our audit also included the financial statement schedule listed
in the Index at Item 14(a)(2) for the year ended October 31, 2000. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hewlett-Packard
Company and subsidiaries at October 31, 2000, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
November 15, 2000
27
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
HEWLETT-PACKARD COMPANY
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 64 present fairly, in all material
respects, the financial position of Hewlett-Packard Company and its subsidiaries
at October 31, 1999 and the results of their operations and their cash flows for
each of the two years in the period ended October 31, 1999, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 14(a)(2) on page 64 presents fairly, in all material
respects, the information set forth therein for each of the two years in the
period ended October 31, 1999, when read in conjunction with the related
consolidated financial statements. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. We have not audited the
consolidated financial statements and financial statement schedule of
Hewlett-Packard Company for any period subsequent to October 31, 1999.
/s/ PricewaterhouseCoopers LLP
San Jose, California
November 23, 1999, except for the stock split disclosed
in Note 12 of the consolidated financial statements, as
to which the date is October 27, 2000.
28
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEARS ENDED OCTOBER 31
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2000 1999 1998
- ------------------------------------- -------- -------- --------
Net revenue:
Products.................................................. $41,446 $36,015 $33,585
Services.................................................. 7,336 6,355 5,834
------- ------- -------
Total net revenue....................................... 48,782 42,370 39,419
------- ------- -------
Costs and expenses:
Cost of products sold..................................... 29,727 25,305 24,044
Cost of services.......................................... 5,137 4,415 3,746
Research and development.................................. 2,646 2,440 2,380
Selling, general and administrative....................... 7,383 6,522 5,850
------- ------- -------
Total costs and expenses................................ 44,893 38,682 36,020
------- ------- -------
Earnings from operations.................................... 3,889 3,688 3,399
Interest income and other, net.............................. 993 708 530
Interest expense............................................ 257 202 235
------- ------- -------
Earnings from continuing operations before taxes............ 4,625 4,194 3,694
Provision for taxes......................................... 1,064 1,090 1,016
------- ------- -------
Net earnings from continuing operations..................... 3,561 3,104 2,678
Net earnings from discontinued operations................... 136 387 267
------- ------- -------
Net earnings................................................ $ 3,697 $ 3,491 $ 2,945
======= ======= =======
Net earnings per share--Continuing operations:
Basic..................................................... $ 1.80 $ 1.54 $ 1.29
Diluted................................................... $ 1.73 $ 1.49 $ 1.26
Net earnings per share--Discontinued operations:
Basic..................................................... $ 0.07 $ 0.19 $ 0.13
Diluted................................................... $ 0.07 $ 0.18 $ 0.13
Net earnings per share--Total:
Basic..................................................... $ 1.87 $ 1.73 $ 1.42
Diluted................................................... $ 1.80 $ 1.67 $ 1.39
Average number of shares and share equivalents:
Basic..................................................... 1,979 2,018 2,068
Diluted................................................... 2,077 2,105 2,144
- ------------------------
All share and per-share amounts reflect the retroactive effects of all stock
splits including the two-for-one stock split in the form of a stock dividend
effective October 27, 2000.
The accompanying notes are an integral part of these financial statements.
29
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
OCTOBER 31
IN MILLIONS, EXCEPT PAR VALUE AND NUMBER OF SHARES 2000 1999
- -------------------------------------------------- -------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,415 $ 5,411
Short-term investments.................................... 592 179
Accounts receivable, net.................................. 6,394 5,958
Financing receivables, net................................ 2,174 1,889
Inventory................................................. 5,699 4,863
Other current assets...................................... 4,970 3,342
------- -------
Total current assets.................................... 23,244 21,642
------- -------
Property, plant and equipment, net.......................... 4,500 4,333
Long-term investments and other assets...................... 6,265 5,789
Net assets of discontinued operations....................... -- 3,533
------- -------
Total assets................................................ $34,009 $35,297
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings................... $ 1,555 $ 3,105
Accounts payable.......................................... 5,049 3,517
Employee compensation and benefits........................ 1,584 1,287
Taxes on earnings......................................... 2,046 2,152
Deferred revenues......................................... 1,759 1,437
Other accrued liabilities................................. 3,204 2,823
------- -------
Total current liabilities............................... 15,197 14,321
------- -------
Long-term debt.............................................. 3,402 1,764
Other liabilities........................................... 1,201 917
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value (300,000,000 shares
authorized; none issued)................................ -- --
Common stock, $0.01 par value (4,800,000,000 shares
authorized; 1,947,312,000 shares issued and outstanding
at October 31, 2000, and 2,009,138,000 shares issued and
outstanding at October 31, 1999)........................ 19 20
Additional paid-in capital................................ -- --
Retained earnings......................................... 14,097 18,275
Accumulated other comprehensive income.................... 93 --
------- -------
Total stockholders' equity.............................. 14,209 18,295
------- -------
Total liabilities and stockholders' equity.................. $34,009 $35,297
======= =======
- ------------------------
All share and per-share amounts reflect the retroactive effects of all stock
splits including the two-for-one stock split in the form of a stock dividend
effective October 27, 2000.
The accompanying notes are an integral part of these financial statements.
30
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31
IN MILLIONS 2000 1999 1998
- ------------------------------ -------- -------- --------
Cash flows from operating activities:
Net earnings from continuing operations................... $ 3,561 $ 3,104 $ 2,678
Adjustments to reconcile net earnings from continuing
operations to net cash provided by operating activities:
Depreciation and amortization......................... 1,368 1,316 1,377
Gains from divestitures............................... (212) -- (27)
Deferred taxes on earnings............................ (689) (171) (1,101)
Tax benefit on employee stock options................. 495 289 157
Changes in assets and liabilities:
Accounts and financing receivables.................. (1,312) (1,637) (1,100)
Inventory........................................... (845) (171) 630
Accounts payable.................................... 1,544 751 61
Taxes on earnings................................... 175 (639) 1,200
Other current assets and liabilities................ (282) 330 731
Other, net.......................................... (343) (76) 154
------- ------- -------
Net cash provided by operating activities........... 3,460 3,096 4,760
------- ------- -------
Cash flows from investing activities:
Investment in property, plant and equipment............... (1,737) (1,134) (1,584)
Disposition of property, plant and equipment.............. 420 542 260
Purchases of investments.................................. (1,131) (1,015) (4,059)
Maturities and sales of investments....................... 1,004 1,063 4,834
Net proceeds from divestitures............................ 448 35 89
Other, net................................................ (130) (119) (148)
------- ------- -------
Net cash used in investing activities............... (1,126) (628) (608)
------- ------- -------
Cash flows from financing activities:
(Decrease) increase in notes payable and short-term
borrowings.............................................. (1,297) 2,399 (734)
Issuance of long-term debt................................ 1,936 240 223
Payment of long-term debt................................. (474) (1,047) (573)
Issuance of common stock under employee stock plans....... 748 660 467
Repurchase of common stock................................ (5,570) (2,643) (2,424)
Dividends................................................. (638) (650) (625)
------- ------- -------
Net cash used in financing activities............... (5,295) (1,041) (3,666)
------- ------- -------
Net cash provided by (used in) discontinued operations...... 965 (62) 488
------- ------- -------
(Decrease) increase in cash and cash equivalents............ (1,996) 1,365 974
Cash and cash equivalents at beginning of period............ 5,411 4,046 3,072
------- ------- -------
Cash and cash equivalents at end of period.................. $ 3,415 $ 5,411 $ 4,046
======= ======= =======
The accompanying notes are an integral part of these financial statements.
31
HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ACCUMULATED
--------------------- ADDITIONAL OTHER
IN MILLIONS EXCEPT NUMBER OF NUMBER OF PAID-IN RETAINED COMPREHENSIVE
SHARES IN THOUSANDS SHARES PAR VALUE CAPITAL EARNINGS INCOME TOTAL
- ---------------------------- --------- --------- ---------- -------- ------------- --------
Balance October 31, 1997............ 2,082,084 $ 2,082 $ -- $14,073 $ -- $16,155
Net earnings...................... -- -- -- 2,945 -- 2,945
Reincorporation................... -- (2,064) 2,064 -- -- --
Issuance of common stock.......... 34,768 26 685 -- -- 711
Repurchase of common stock........ (86,046) (24) (2,400) -- (2,424)
Tax benefit on employee stock
options......................... -- -- 157 -- -- 157
Dividends......................... -- -- -- (625) -- (625)
--------- ------- ------- ------- ------- -------
Balance October 31, 1998............ 2,030,806 20 506 16,393 -- 16,919
Net earnings...................... -- -- -- 3,491 -- 3,491
Issuance of common stock.......... 40,416 -- 889 -- -- 889
Repurchase of common stock........ (62,084) -- (1,684) (959) -- (2,643)
Tax benefit on employee stock
options......................... -- -- 289 -- -- 289
Dividends......................... -- -- -- (650) -- (650)
--------- ------- ------- ------- ------- -------
Balance October 31, 1999............ 2,009,138 20 -- 18,275 -- 18,295
Net earnings...................... -- -- -- 3,697 -- 3,697
Net unrealized gain on
available-for-sale securities... -- -- -- -- 93 93
-------
Comprehensive income.............. 3,790
-------
Issuance of common stock.......... 35,152 -- 741 -- -- 741
Repurchase of common stock........ (96,978) (1) (2,571) (2,998) -- (5,570)
Tax benefit on employee stock
options......................... -- -- 495 -- -- 495
Initial public offering and
spin-off of Agilent
Technologies.................... -- -- 1,335 (4,239) -- (2,904)
Dividends......................... -- -- -- (638) -- (638)
--------- ------- ------- ------- ------- -------
Balance October 31, 2000............ 1,947,312 $ 19 $ -- $14,097 $ 93 $14,209
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All share and dollar amounts reflect the retroactive effects of all stock splits
including the two-for-one st